Diversification

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Diversification

 

one of the forms of capital concentration.

In diversifying their production, firms penetrate into sectors and fields that are new for them; they enlarge their range of goods and gradually transform themselves into multisector complexes. Diversification is based on the attempt of capitalist firms to maintain their business under conditions of uneven economic development, with rapid growth of some sectors and decline or stagnation of others. The process of diversification has developed particularly since the mid-1950’s. Diversification has grown in industry, transport, construction, and the financial field in the USA, Western Europe, and Japan.

The nature of diversification is determined by the socioeconomic traits of the given country. Nevertheless, there are certain general factors (pertaining to all countries) that affect its development: the scientific-technological revolution, the struggle for high profits, the need to seek out new spheres for the application of profits, the militarization of the economy, the competitive struggle, and the fear of lagging behind in technical progress. As a result of diversification, firms and especially the monopolies have acquired a multisector character; they penetrate first of all into new, highly profitable fields with high growth rates, such as electronics and chemistry. It is advantageous for companies to take the path of combined production, that is, to produce various goods from one and the same basic raw material. This type of production lowers the expenses of the companies, especially those for research; also, research frequently leads to inventions that are remote from the firm’s specialization.

The flow of capital from less profitable sectors into more profitable ones takes place by means of diversification, thus bypassing the traditional capital market. The function of founding new enterprises is gradually shifting to firms which, by diversifying their production, attempt to insure themselves against possible failures and bankruptcies, although such attempts often fail. The process of diversification is speeded up by the merger of separate, formerly independent companies; in the USA the number of such mergers in 1968 was 2,268, more than eight times their average number for the period 1950-54. The majority of these mergers were of a conglomerate character. American concerns have entered the fields of services, construction, real estate, and publishing. They also participate in developing instructional systems, buying and selling information, and leasing out equipment. With an eye to receiving government contacts, they plan slum clearances, design cities, install air and water purifying systems in populated areas, and so on. Under the influence of diversification the structure of firms is changing: from specialized companies they are being transformed into multisector complexes. Thus, steel firms are producing other metals and materials in addition to steel, and the former manufacturers of tin cans are producing containers made of various materials. Some firms have set themselves the task of introducing new technology, engaging in research, and utilizing inventions.

As the result of the merger of a large number of companies in the USA, major firms have been formed: conglomerates consisting of enterprises that do not have any sort of functional ties among themselves. Their rise is connected with various types of speculations, shady transactions, and machinations, in which many banks and mutual funds have taken part. The crisis that developed in 1969 affected the conglomerates, compelling them to sell off a part of their assets.

N. I. MNOGOLET

References in periodicals archive ?
Because of the focus on diversification in this article, a summary means analysis of the data is presented in Table 2 based on insurer diversification profiles.
The diversification columns in Table 2 present the diversification measures based on the modified Herfindahl Index associated with each respective profile.
The relationship shared by an insurer's diversification profile, that is, the interaction of product and geographic diversification levels, and firm performance is complex and defies simplistic explanation.
Interestingly, intermediate levels of product diversification coupled with high levels of geographic diversification strategies appear to positively relate to firm performance.
At the other extreme, insurers with a focused geographic strategy and intermediate levels of product diversification have lower performance levels than other similar insurers that employ either higher or lower levels of product diversification.
Second, the complex relationship geographic diversification shares with product diversification and firm performance must be carefully considered within an insurer's over-all diversification strategy; a flawed understanding could result in significantly differing performance outcomes.
Table 5 compares the dominant naive strategies and the efficient set returns, standard deviations and their effectiveness of diversification for each of the two diversification strategies considered.
The results show that for managers diversification only, the strategy of equal allocation to all managers' portfolio achieved a higher return (19.
Our analysis of managers' diversification within Nigerian market during the period 1997 - 2001 shows that efficient portfolios (constant correlation model portfolios) outperformed all strategies based on "all allocation in one property manager's portfolio" and the strategy based on "equal allocation to each of the managers".
Although, the study did not test the statistical significance of the benefits being found from managers' diversification and examine the effects of cycle on the performance of the portfolios, it has shown that there are benefits derivable from managers' diversification.
2006) Diversification Effects of Direct versus Indirect Real Estate Investments in the U.
2000) A Note on Intracity Geographic Diversification of Real Estate Portfolios: Evidence from Hong Kong.

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